Economics • Economic BasicsMedium
What does the 'Quantity Theory of Money' (Fisher's Equation of Exchange, MV = PT) primarily imply?
A. Changes in the money supply (M) are directly proportional to changes in the price level (P) in the long run✓ Correct Answer
B. Velocity of money (V) is inversely related to transaction volume (T)
C. Price level (P) depends exclusively on real output rather than money supply
D. The total volume of trade (T) dictates the interest rate in an economy
💡 Solution & Explanation
Fisher's equation of exchange, expressed as MV equals PT, posits that in the long run, changes in the money supply produce a directly proportional shift in the overall price level, assuming velocity and transaction volume remain stable. Alternative interpretations regarding interest rates or inverse velocities contradict the core monetarist premise of the equation.
More Economics Economic Basics questions
- Which of the following best defines 'Opportunity Cost' in economic decision-making?
- In the theory of consumer behavior, what type of goods are characterized by a negative income elasticity of…
- In macroeconomic theory, what does 'Crowding Out Effect' imply?
- What is the primary implication of a high concentration of mineral and forest-based industries in the…
- Which of the following describes a situation of 'Stagflation' within a macroeconomic framework?